LRCX, MTSN Among Top Needham Picks Heading into Semicon West

By Tiernan Ray

The annual trade show for semiconductor equipment makers, Semicon West, kicks off in San Francisco on July 8th, and Needham & Co.‘s equipment analyst Edwin Mok today offers an upbeat preview of what he expects to be a “positive tone” among exhibitors at the show.

His view of the positives and negatives that may emerge is summed up as follows: “A stronger-than-expected DRAM and a pick-up in 28nm/20nm foundry spending, but some pushout of 16/14nm FinFET orders.”

Probably, attendees will be talking about the rising “capital intensity” of industry innovations such as “FinFET, 3D NAND, multi-patterning,” he thinks.

For so-called front-end equipment vendors, Q3 could be a little weak on orders, but 2015 will be brighter:

Our recent industry checks and datapoints off market news are incrementally more positive for WFE in 3Q14, which supports our call on bookings to start improving QoQ even though shipments could still be flat to down 10% QoQ. On the other hand, we believe a majority of the new investments in 3D NAND and 16/14nm FinFET foundry are pushed out to 2015. As a result, we expect QoQ growth to return in 4Q14, and we believe 2015 is shaping up to be a stronger year than our prior expectation.

His top front-end equipment name is Lam Research (LRCX), because of its leverage to the healthy DRAM trends. Going into the second half, he likes smaller vendors such as Mattson Technology (MTSN), Ultra Clean Holdings (UCTT), and Entegris (ENTG).

Among “back-end” providers, in the test and assembly area, he likes Xcerra (XCRA).

Among large themes, health in DRAM chips is front and center:

Recent positive preannouncements by Intel (INTC) and Micron’s (MU) F3Q14 earnings reports confirmed the improved PC demand and the tightened supply environment for DRAM, which we believe provides the foundation for increased investments in DRAM capacity. Our recent checks suggest both Samsung and Hynix [both Not Rated] have started to expand capacity beyond node shrinks, which is the first time in many years we have heard of capacity expansion in the DRAM space. As a result, near-term WFE spending in 3Q/4Q14 is supported by this increased optimism in DRAM, and we believe this trend could continue into 2015.

So is spending to add “incremental” capacity to production of chips at 28-nanometer and 20-nanometer:

We understand GLOBALFOUNDRIES is adding incremental 20nm capacity to its Malta, NY fab and Samsung is also adding incremental tools in Austin. This is supported by recent media reports suggesting that QCOM [Not Rated] is shifting 20nm foundry orders to Samsung and GLOBALFOUNDRIES. Since TSMC continues to have a leading position in 28nm foundry and almost has a monopoly position in 20nm, we believe fabless chipmakers are worried that TSMC will not have enough capacity to support their needs. Beyond the 3 top foundries, we believe both UMC and SMI [both Not Rated] are adding some 28nm capacities due to the continued supply tightness at 28nm. Overall, we see incremental orders from the foundry segment in 2H14, offsetting the pocket created by the delay of 16/14nm FinFET (see the next point).

Orders for the next smaller feature sizes of circuits, 16-nanometer and 14-nanometer, are going to be delayed a bit:

TSMC had previously stated that it will spend ~70% of its 2014 capex budget in 1H14, mostly on 20nm capacity buildup (to ~40kwspm). We believe the majority of tools for 20nm were shipped in 1H14. Going into 2H14, TSMC has plans for initial investments in 16nm FinFET capacity, but we believe most of the orders will not come until 4Q14, resulting in a low point in 3Q14. Due to the 20nm demand and technical issues on the 14nm FinFET process, we understand Samsung has delayed the S3 logic fab project. We have heard that GLOBALFOUNDRIES will finalize plans for 14nm capacity in Malta, but we expect 14nm spending will be limited to a small pilot line within 2014, with the bulk of the tool orders not shipping until 2015. Overall, we believe orders for 16/14nm will be pushed out by roughly one quarter from prior targets.

And production of 3-D NAND memory circuits is also seeing some delays:

1Q14 earnings season, most equipment companies have already confirmed that the next phase of Samsung’s 3D NAND capacity build is delayed due to yield issues associated with this new technology. Additionally, based on recent commentaries by SNDK [Buy], MU and Toshiba [Not Rated], we believe these NAND players have also delayed their 3D NAND pilot line investments to late 2014 or early 2015 as they focus capital investments on shrinking existing lines to the 16/14nm node. Looking forward, we believe 3D NAND technology will drive incremental NAND spending in 2015.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.